US stocks’ torrid climb to start 2024 is evoking worrisome comparisons with past boom-and-bust cycles on Wall Street, sparking debate over the risk that the market is overheating.

There’s ample reason to wonder whether shares have advanced at an unsustainable pace: The S&P 500 Index has closed at record highs 16 times this year, accounting for about a third of all trading days; AI darling Nvidia Corp. has soared nearly 80%, adding roughly $1 trillion in market value, even after sliding Friday along with other tech shares; and speculative areas like Bitcoin have surged.

Yet there are signs that the strength, based in large part on the economy’s resilience and robust corporate earnings, hasn’t turned into a speculative frenzy.

Several of the so-called Magnificent Seven stocks have sputtered, showing that investors aren’t throwing money at the market with abandon. The muted reaction to initial public offerings of late also backs up that notion. What’s more, an equal-weighted version of the S&P 500 just hit a historic high, indicating the rally is broadening out. And valuations of the benchmark’s biggest stocks are well below levels seen for the market leaders at the height of previous market cycles.

Scott Chronert at Citigroup Inc. also notes that the seven megacap tech firms contribute roughly 20% to S&P 500 earnings, which he says largely justifies their market-capitalization weighting of about a third of the gauge.

“There was a premise where you were trying to build out Internet infrastructure back then, much like right now we’re building out AI,” Chronert said. “But the nature of the companies’ revenue and the cash flows that are supporting it are markedly different.”

Megacap Divide
The Magnificent Seven companies — Apple Inc., Alphabet Inc., Amazon.com Inc., Meta Platforms Inc., Microsoft Corp., Nvidia and Tesla Inc. — moved in unison through much of last year, driving the brunt of the market’s gains and reigning until very recently as the S&P 500’s biggest firms.

The relentless demand for the group’s shares drew parallels to the speculative frenzy surrounding Internet stocks at the turn of the century.

But the seven have diverged in 2024 as investors soured on the outlook for several firms, signaling that the froth around the cohort may have diminished.

Apple has dropped this year, in part amid concern over iPhone sales in China. The firm closed at a record in December before retreating. With demand for its vehicles waning, Tesla has fared even worse, dropping below Eli Lilly & Co. in terms of market value. Google parent Alphabet has also declined this year.

More Participants
Countering worries that a handful of shares were powering the bull run, the gains are showing signs of extending beyond just technology.

The S&P 500 Equal Weight Index set a closing record last week for the first time in two years. The gauge gives an equal share to each constituent, rather than weighting by market capitalization.

The share of S&P 500 stocks at all-time highs in the past month has risen, reaching the highest since early 2022, data compiled by Bloomberg Intelligence strategists Gina Martin Adams and Gillian Wolff show.

Even so, less than a third of stocks are at records, “leaving plenty of room” for the bull market to gather participants, they said in a note.

In contrast, by the time the tech bubble was about to burst in early 2000, the ratio of stocks at historic levels was waning, from around 60% at one point in 1997 to 20% at the turn of the century, the strategists wrote.

IPO Blues
Investors’ limited appetite for new listings is another indicator that sentiment is short of the kind of euphoria typically seen around bubbles.

In 1999, about 42% of US IPOs that raised more than $100 million saw share prices pop 50% or more through the close of the first day of trading, data compiled by Bloomberg show. In 2024, only one — CG Oncology Inc. — has met that criteria.

The US IPO market raised about $89 billion in 1999. While the market saw record business in 2021, it’s hit a wall since. There have been 36 IPOs in the US this year, raising $7.2 billion. In 2021, companies generated roughly $300 billion from around 1,000 deals.

Valuations Compared
Robust profits from some of the tech behemoths have also brought down sky-high valuations. They remain relatively stretched, but they’re still well below prior peaks.

The Magnificent Seven stocks, for example, trade near their average price-to-earnings ratio since 2015, data compiled by Bloomberg show.

And take the largest five S&P 500 stocks today. They trade at less than half the multiples of the top stocks in early 2000 — Intel Corp., Cisco Systems Inc., Microsoft and Dell — a Bloomberg Intelligence analysis shows.

Valuations are also contained across tech shares in areas including AI and robotics, with most of those baskets at or below their five-year average for price-to-sales multiples, according to BI.

This article was provided by Bloomberg News.